Tech stocks are known for their high growth and volatility, but many have sky-high valuations and unproven business models.
The best tech stocks provide investors with long-term growth without exposing them to the risks typically associated with Silicon Valley startups. These stocks have reasonable valuations based on fundamental metrics, such as the price-to-earnings (P/E) ratio, and generate consistent profits.
“Big Tech should not be lumped together and investors would be wise to separate the sector by industry group and focus on those that can deliver consistent earnings into a contracting economy,” said James Demmert, chief investment officer at Main Street Research.
We selected the best tech stocks based on earnings expectations, positive net income in at least four of the past five years, large market capitalization and a “buy” consensus among analysts.
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Best tech stocks
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Broadcom (AVGO)
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ASML (ASML)
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Salesforce (CRM)
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Cisco Systems (CSCO)
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SAP (SAP)
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Compare the best tech companies
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Methodology
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Final verdict
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Types of tech stocks
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How to invest in tech stocks
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Pros and cons of tech stocks
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Frequently asked questions (FAQs)
Best tech stocks
Broadcom (AVGO)
Sector
Technology
Market cap
$384.9 billion
YTD performance
68.6%
What you should know
Broadcom is a diversified semiconductor company that designs, develops and supplies a range of analog semiconductor devices. Broadcom supplies chips for data centers, broadband, wireless, networking, storage, and industrial markets.
Broadcom is highly exposed to the smartphone market, and Apple (AAPL) accounted for about 20% of the company’s revenue in fiscal 2022. However, Broadcom has been investing in diversifying its business in recent years, including acquiring network gear maker Brocade in 2017, software company CA Technologies in 2018 and the enterprise security business of Symantec in 2019. Broadcom is also in the process of acquiring cloud software company VMware (VMW) for $61 billion, but that deal has faced intense regulatory scrutiny. Broadcom reported 8% net revenue growth in the fiscal second quarter.
Pros and cons
Pros
- A ramp-up of global 5G networks should generate higher demand for radio frequency device content.
- It is highly exposed to large, high-growth data centers and cloud computing markets.
- An aggressive acquisition strategy has diversified the business away from core semiconductor sales.
Cons
- Significant revenue loss potential if Apple pursues its plan to drop Broadcom as a supplier.
- Apple and other large customers can exert pricing leverage, compressing margins.
- Optical networking and enterprise storage end markets limit visibility and create financial volatility.
More details
P/E: 28.7.
ASML (ASML)
Sector
Technology
Market cap
$279.63 billion
YTD performance
26.48%
What you should know
ASML produces photolithography systems and other semiconductor processing equipment used in semiconductor fabrication. The company’s extreme ultraviolet lithography machines allow semiconductor companies to produce smaller, more efficient and powerful chips used for advanced applications such as machine learning, artificial intelligence and autonomous vehicles.
As semiconductor designs grow more complex over time, ASML’s EUV lithography technology will become even more essential to customers like Taiwan Semiconductor Manufacturing Company (TSMC), creating an attractive long-term growth opportunity for ASML investors. ASML recently guided more than 30% revenue growth in 2023.
Pros and cons
Pros
- Market leader in advanced semiconductor photolithography.
- The complexity of lithography tools helps insulate ASML from the competition.
- ASML has steadily improved efficiency and profitability throughout semiconductor market cycles.
Cons
- Dependence on Taiwan Semiconductor Manufacturing Co. and a handful of other buyers increases the risks of losing customers.
- Reliance on key international suppliers exposes ASML to supply chain bottlenecks.
- Delays in EUV lithography technology development could lead to wafer fabrication equipment market share loss.
More details
P/E: 33.64.
Salesforce (CRM)
Sector
Technology
Market cap
$254.93 billion
YTD performance
89.98%
What you should know
Salesforce is the largest provider of customer relationship management software and operates a cloud-based Software-as-a-Service (SaaS) model. Salesforce’s CRM software includes data visualization, automation, analytics, marketing, enterprise communication and e-commerce tools.
In fiscal year 2023, Salesforce reported 18% revenue growth and a record $7.1 billion operating cash flow, up 19% year over year. Salesforce recently announced a restructuring plan to improve operating margins over the next two years, a program that could potentially kick Salesforce’s profitability and stock price to the next level. Salesforce is also doubling down on its share repurchase program increasing it to $20 billion, according to the company’s March announcement.
While Salesforce’s spectacular growth finally seems to be slowing, its pivot to gross margin expansion should maintain impressive earnings growth for years to come.
Pros and cons
Pros
- Leading market share in sales management automation, a market that has significant long-term growth potential.
- Several noncore growth opportunities, including customer service, e-commerce and marketing automation.
- Focus on margin expansion and profitability could accelerate earnings growth even as sales growth slows.
Cons
- Increasing competition from Oracle, Microsoft and other tech companies.
- Integration and execution risks associated with past and future acquisitions, including its deal for Slack.
- Shifting in focus to profitability may suggest the company anticipates further revenue growth slowdowns in coming years.
More details
P/E: 99.4.
Cisco Systems (CSCO)
Sector
Technology
Market cap
$197.42 billion
YTD performance
4.67%
What you should know
Cisco Systems designs and sells a diversified portfolio of networking, security, collaboration, application and cloud computing technologies. The company’s largest segment is its secure and agile network business, which includes its switches, routers and networking hardware.
In August, Cisco reported 16% year-over-year revenue growth in the fiscal fourth quarter, including 5% growth in total annualized recurring revenue and 10% growth in product ARR. Total software revenue was also up 17% year-over-year, while software subscription revenue was up 20%. Remaining performance obligations also grew 11% from a year ago.
Cisco is a well-established market leader in enterprise networking, and it should continue to benefit from the rise of hybrid cloud and work environments.
Pros and cons
Pros
- Forward earnings multiple of 12.6 suggests little downside valuation risk.
- Attractive 3% dividend yield.
- Shifting toward a higher mix of software and subscription-based revenue improves financial visibility.
Cons
- The core networking market has limited growth opportunities.
- Cisco has lost networking and security market share over the past decade.
- Cisco is trailing Arista Networks in high-speed, public cloud application market share.
More details
P/E: 14.68.
SAP (SAP)
Sector
Technology
Market cap
$196.81 billion
YTD performance
56.82%
What you should know
SAP is a leading provider of enterprise application software for accounting, supply chain management and CRM. SAP is a global market leader in enterprise resource planning software.
In July, SAP reported that second-quarter cloud revenue was up 19% year-over-year, driven by an impressive 74% SAP S/4HANA cloud revenue growth. In addition, the company said its cloud backlog was up 21% from a year ago.
SAP divested its large stake in Qualtrics in June for a profit of 3.2 billion euros. SAP has also successfully migrated over 20,000 customers and half a million tenants to its next-generation harmonized cloud infrastructure.
The company also expects high-visibility cloud revenue and software support revenue will represent 82% of total 2023 revenue.
Pros and cons
Pros
- Expecting high-visibility cloud revenue.
- Opportunity to extract significantly more lifetime value for customers who have transitioned to cloud services.
- Growing scale and cloud offerings provide margin expansion opportunities.
Cons
- The COVID-19 pandemic may have a lasting impact on intelligence spending offerings, especially those tied to business travel.
- The sale of Qualtrics just five years after its initial acquisition highlights SAP’s questionable capital allocation strategy.
- Phase-out of on-premise ERP software support creates risk of customer churn.
More details
P/E: 30.19.
Compare the best tech companies
| Company | Sector | Market cap | YTD performance |
|---|---|---|---|
| Broadcom (AVGO) | Technology | $384.9 billion | 68.6% |
| ASML (ASML) | Technology | $279.63 billion | 26.48% |
| Salesforce (CRM) | Technology | $254.93 billion | 89.98% |
| Cisco Systems (CSCO) | Technology | $197.42 billion | 4.67% |
| SAP (SAP) | Technology | $196.81 billion | 56.82% |
Methodology
Our best tech stocks trade on a major U.S. stock exchange and meet the following criteria:
- Consensus analyst recommendation of “buy” or better. A high number of analyst “buy” ratings indicates an expectation the stock will outperform the overall market.
- Market capitalization of at least $10 billion. A company with a leading market share and competitive advantages in a sizable industry, will have a market cap greater than $10 billion. Small- and mid-cap tech stocks generally either have too much risk associated with their outlooks or are not operating in an industry with significant long-term growth prospects.
- An Altimeter overall grade of at least a B as of May 2023. In selecting the best stocks for this list, we applied a screen, considering only stocks rated a B or better by Altimeter. The overall grade takes into account profitability, earning stability, valuation and earning expectations. Grades of B or higher for both are stocks that are ranked in the top percentile of nearly 5,000 stocks in Altimeter’s stock database. This indicates that these companies have strong valuations with the ability to improve returns.
- Positive net income in at least four of the past five years. Many high-growth tech stocks are not profitable, which is a reflection of their unproven business models. We screened for profitability in at least four of the past five years. This type of screen among the selected stocks shows whether the business is consistently profitable despite blips, such as the COVID-19 shutdowns in early 2020.
- Forward earnings multiple less than 30. Tech stocks generally have higher valuations than the overall market because of their growth opportunities. While it’s okay for investors to pay more for growth, stocks with forward earnings multiples over 30 are at risk of significant downside in the event of a cyclical economic downturn or a slowdown in revenue growth.
Why other stocks didn’t make the cut
Exciting technology also inspires great enthusiasm among investors, making the tech sector prone to bubbles and unrealistic valuations. The dot-com bubble of the late 1990s is one of the most well-known examples of this type of irrational tech sector pricing. Investors should avoid tech stocks priced at sky-high P/E ratios, price-to-sales (P/S) ratios or price-to-free cash flow ratios.
Investors should typically avoid stocks that trade at excessive price-to-earning multiples such as Tesla (TSLA). The stock’s forward P/E is over 70. A forward P/E is a current stock’s price over its predicted earnings per share. All the stocks selected for this list have a forward P/E of 30 or lower. For example, the forward P/E for SAP is close to 20, givin
Final verdict
The technology sector has plenty of stocks with exciting growth potential and the possibility of generating robust long-term gains for investors. But many of the highest-growth technology companies have not yet demonstrated they can consistently turn a profit, relying heavily on debt and share offerings to fund their growth investments.
One of our top recommendations for best tech stocks is Broadcom, which has a reasonable valuation and a high return on assets compared with its peers. In terms of risk, there are no major flags indicated by Altimeter’s risk assessment tool.
Types of tech stocks
Technology impacts virtually every different part of the economy. Some tech companies specialize in consumer electronics, such as Apple (AAPL), Sony (SONY) and GoPro (GPRO). Others specialize in software infrastructure, such as Microsoft (MSFT), Oracle (ORCL) and Adobe (ADBE).
Semiconductor and semiconductor equipment makers are also popular technology stock investments, including Nvidia (NVDA), Advanced Micro Devices (AMD) and Taiwan Semiconductor Manufacturing (TSM). Other tech industries include communication equipment, computer hardware, electronic components, information technology services, scientific and technical instruments, solar technology and others.
How to invest in tech stocks
Investors who are comfortable with their ability to analyze tech stocks can create a personalized portfolio of individual tech stocks by choosing stocks they believe will outperform their peers. For example, an investor may choose to buy shares of our five best tech stocks included above. However, before buying shares of any individual tech stock, ensure you fully understand the company’s business and financial metrics and are comfortable using basic fundamental valuation strategies. In addition, individual tech stock investors can reduce risk by diversifying their investments into a large number of stocks rather than concentrating on only a few.
Investors can also invest in tech stocks via technology exchange-traded funds, such as the Technology Select Sector SPDR Fund (XLK). These tech ETFs provide an easy way for investors to add diversified exposure to dozens or even hundreds of tech stocks at a time. But while tech stock ETFs help reduce the risks associated with individual tech stocks, they also limit the upside investors can experience if they focus their investment on a handful of top-performing companies. Tech stock ETFs also charge management fees in the form of expense ratios that can eat into returns over time.
Pros and cons of tech stocks
Tech stocks have a strong track record of outperforming the overall , but they also come with a unique set of risks.
Tech Stock Pros:
- Sector performance. In the past 10 years, the Technology Select Sector SPDR (XLK) exchange-traded fund has generated a higher return than the S&P 500.
- Diversification. Because technology is utilized in so many ways, it’s possible to construct a portfolio of tech stocks that aren’t highly correlated.
- Revenue growth. The technology sector is known for its growth stocks, increasing the potential long-term upside for investors.
Tech Stock Cons:
- Valuations. Many tech stocks trade at extremely high valuations based on profitability and sales.
- Volatility. The tech sector is known for its volatility and is often among the hardest hit during market downturns.
- Dividends. While some tech stocks pay generous dividends, they are not typical for stocks in this sector.
Frequently asked questions (FAQs)
Yes, high-quality tech stocks with sound financial fundamentals and reasonable valuations are as safe as any top stocks from any other market sector.
Higher interest rates aren’t inherently bad for all tech stocks. But rising interest rates tend to negatively impact the valuations of high-growth stocks, many of which are in the tech sector.
Analysts often use discounted cash flow models to value growth stocks, and these models assign less value to future cash flows when the discounted interest rate is higher.
The technology sector has produced some of the best-performing stocks in history, including Apple, Microsoft and Nvidia.
To avoid the volatility and risks often associated with tech stocks, long-term investors should maintain a diversified investment portfolio and focus on profitable, high-quality tech stocks with attractive business fundamentals.
The so-called “big seven” tech stocks are Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Tesla (TSLA), Alphabet (GOOGL), Amazon (AMZN), and Meta Platforms (META). While these stocks heavily rely on technology at the core of their businesses, Tesla and Amazon are technically classified as consumer discretionary stocks and Meta and Alphabet are included in the communications services sector.
Editor’s Note:This article contains updated information from previously published stories:
- Tech Five: Gamestop to report earnings
- Q2 Holdings IPO jumps 28% in debut
- Tech stocks: BlackBerry shares slide, Netflix surges
- Tech stocks: Nokia shares sink
- Tech Five: Cisco surges, latest on Apple-Beats
- Tech stocks: Zynga, BlackBerry soar
- Tech Five: Netflix, IBM kick off earnings rush
- Tech stocks: Nokia still trading higher
- Tech stocks are partying like its 1999, but Wall Street pros say it’s no irrational bubble
- Tech stocks: Facebook surges early
As a seasoned technology enthusiast with a deep understanding of the tech industry, I bring a wealth of knowledge to the discussion of the best tech stocks outlined in the provided article. My expertise spans various aspects of the tech sector, including market trends, company strategies, financial metrics, and risk assessments. I've closely followed the performance of major tech companies and have a comprehensive understanding of the factors that contribute to their success or challenges.
Now, let's delve into the information related to the best tech stocks mentioned in the article:
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Broadcom (AVGO)
- Sector: Technology
- Market Cap: $384.9 billion
- YTD Performance: 68.6%
- Key Points:
- Diversified semiconductor company.
- Supplies analog semiconductor devices for data centers, broadband, wireless, networking, storage, and industrial markets.
- High exposure to the smartphone market, with Apple accounting for about 20% of revenue.
- Recent acquisitions include Brocade, CA Technologies, and Symantec's enterprise security business.
- In the process of acquiring VMware for $61 billion.
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ASML (ASML)
- Sector: Technology
- Market Cap: $279.63 billion
- YTD Performance: 26.48%
- Key Points:
- Produces photolithography systems and semiconductor processing equipment.
- Known for extreme ultraviolet lithography machines for smaller, more efficient chips.
- Dependency on key buyers like Taiwan Semiconductor Manufacturing Company (TSMC).
- Recent guidance indicates more than 30% revenue growth in 2023.
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Salesforce (CRM)
- Sector: Technology
- Market Cap: $254.93 billion
- YTD Performance: 89.98%
- Key Points:
- Largest provider of customer relationship management (CRM) software.
- Operates on a cloud-based Software-as-a-Service (SaaS) model.
- Reported 18% revenue growth in fiscal year 2023.
- Restructuring plan announced to improve operating margins.
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Cisco Systems (CSCO)
- Sector: Technology
- Market Cap: $197.42 billion
- YTD Performance: 4.67%
- Key Points:
- Designs and sells networking, security, collaboration, application, and cloud computing technologies.
- Reported 16% YoY revenue growth in the fiscal fourth quarter.
- Well-established market leader in enterprise networking.
- Shifting toward a higher mix of software and subscription-based revenue.
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SAP (SAP)
- Sector: Technology
- Market Cap: $196.81 billion
- YTD Performance: 56.82%
- Key Points:
- Leading provider of enterprise application software.
- Global market leader in enterprise resource planning (ERP) software.
- Reported 19% YoY cloud revenue growth in the second quarter.
- Successfully migrated customers to next-gen harmonized cloud infrastructure.
Methodology for Selecting Best Tech Stocks:
- Consensus analyst recommendation of "buy" or better.
- Market capitalization of at least $10 billion.
- Altimeter overall grade of at least a B as of May 2023.
- Positive net income in at least four of the past five years.
- Forward earnings multiple less than 30.
Final Verdict:
- Broadcom is highlighted as a top recommendation, emphasizing its reasonable valuation and high return on assets.
- Altimeter's risk assessment tool does not raise major flags for Broadcom.
Types of Tech Stocks:
- Technology companies specialize in various areas, including consumer electronics, software infrastructure, semiconductor manufacturing, communication equipment, and more.
How to Invest in Tech Stocks:
- Investors can create a personalized portfolio of individual tech stocks or invest in tech stock ETFs for diversified exposure.
- Emphasizes the importance of understanding a company's business and financial metrics before investing.
Pros and Cons of Tech Stocks:
- Pros include sector performance, diversification opportunities, and revenue growth.
- Cons involve high valuations, volatility, and limited dividend payouts.
Frequently Asked Questions (FAQs):
- High-quality tech stocks with sound financial fundamentals and reasonable valuations are considered safe.
- Rising interest rates may negatively impact the valuations of high-growth tech stocks.
- Diversification and focus on profitable, high-quality tech stocks are recommended to mitigate risks.
In summary, the provided article offers valuable insights into the best tech stocks, accompanied by a comprehensive methodology, analysis of individual stocks, and guidance on investing in the dynamic tech sector.
